Looking for advice on how to start

General Real Estate Investing
1

Hello Investors,
My husband and I have been interested in investing in real estate for quite some time though we had some debt and other issues that we needed to clear up and now I’m pretty sure that we are ready. Here’s the situation:

I am a stay at home mom and my husband has a healthy full time steady income/career. In terms of Debt and assets we have the following;
Debt = monthly car payment, monthly mortgage payment on our personal residence, student loans and three CC at a $0 balance.
Assets = some investable cash

We have been approved by Wells and Bank of America for mortgages on investment property. We asked for 60K and the terms were; Wells 60k with 20% down on a single family 25% down on duplex and 30% on muti unit dwellings for 30yrs at 4.625%. Bank of America basically offered the same deal with a higher rate of 5.2% (maybe this is because we have more of a relationship with Wells, who knows!)

So what are the concerns? We have sat down and came up with a plan, our short term goal is to acquire 5 residential rental properties per year for the first four years and then we will reassess our goals at this point. Of course the idea is to begin to create passive income (knowing that a reasonable amount of work will be required through the process) so that we can begin to build long term wealth for our family (we also have 4 children).

The issue is that the banks will only issue 4 mortgages per person and this includes our personal mortgage. Therefore will we only be able to acquire three mortgages through traditional financing. As of today Wells is saying that we can acquire a total of 175k in additional debt before being at the max for DTI. My first concern is if we purchase three single family properties with a 60k loan amount after down payment we will be cash strapped and out of traditional financing options.

My second concern is, my husband works for a company that moves us around quit frequently, we will more than likely relocate again in two/three years for his next promotion. We moved from Kennesaw GA (a suburb of Atlanta) 18 months ago and we loved it there so much that we want to invest in that area, but of course we are not there to physically take care of the properties so we would need to have a team in place. We could purchase were we currently are but we wont be here forever either and the market is not as great. We are natives of Pittsburgh PA which is also an option for investing because we have family there and I have a PA real estate license. Most investors I have spoke with say “never buy rental properties in a city where you don’t live” I understand this way of thinking but it may be another three years before we are in a city that we will stay in for 5+ years. I want to invest now while the market and rates are great.

Does anyone have any suggestions on how to get started?
Should I be concerned about the fact that I don’t live where I’m investing?
What’s the most strategic way to get started considering my current situation and my 4 year goal?
Should get a reciprocal license in the city where we invest so that I can access the Multi list and refer or do my own deals?
How do I get around that 4 mortgage limit situation on investment properties?

I would appreciate any suggestions.

PS. Please respond in lay terms, although I am licensed we moved two months after I obtained to the license so I am a novice and I am also in no way an experienced investor :slight_smile:

2

Welcome to the world of REI! I will try to give some basic answers to your questions and then we can take it from there.

How to get started? Your plan sounds great. The compounding income will maximize your investment. My advice: Take your time to make sure each investment will cash flow well and has good structural condition (i.e. get a home inspection).

Strategy? I recommend looking for distressed properties for investment. These include REO (bank owned properties/foreclosures), short sales and auctions. Besides the MLS there are some good resources on the internet.

4 Mortgage limit? The Fannie Mae guidelines were revised again last year back to the original 10 mortgage limit for individual investors. During the financial crisis they lowered them to 4. What is interesting is that even though nearly every mortgage is backed by the government some originators are still stuck at the 4 limit. But look around because there are increasingly more lenders that will do 10.

Investing in a town you do not live in? Start investing in the town you are living in right now - if the market is good. When you are ready to move, simply locate a good highly recommended property management firm to handle the day to day management. Though your cash flow will not be as good (they charge 8-10% of gross income), you can benefit from the market appreciation and always sell them to finance more local properties. Plus, between now on then, you will get some great hands on experience.

Hope this points you in a good direction. Let me know if you need more information.

3

Thank you for taking the time to reply. I think it’s a great idea to purchase here and have the hands on experience. I am also interested in looking at short sales and the like, I guess my concern is, Can I use traditional bank financing on distressed property? Also I am not really sure how to find these properties outside of an agent and public record.

In terms of cash flow, Do you think its realistic to set a goal of 400.00 + cash flow for each unit?

4

Yes, you can use bank financing on distressed properties. If you’re looking to buy a cheap home, you need to check with your lender to find out the minimum amount that you can finance. Certain kinds of lenders will allow you to finance smaller amounts while others may have minimum requirements. Much of this has to do with the type of lenders you are working with.

There actually are quite a few programs designed to assist buyers of discounted properties. Check out these articles for more information:

http://www.foreclosuredeals.com/fannie-mae-foreclosures/#financin-on-a-fannie-mae-purchase
http://www.foreclosuredeals.com/freddie-mac-foreclosures/#home-affordable-foreclosure-alternatives-how-does-it-work
http://www.foreclosuredeals.com/usda-homes/#financing-programs
http://www.foreclosuredeals.com/fha-foreclosures/#fha-loan-types
http://www.foreclosuredeals.com/va-foreclosures/#va-home-loan-program
http://www.foreclosuredeals.com/hud-homes/#what-about-financing

You can find discounted properties listed on the internet. There are a few good websites that list only discounted, foreclosed, REO, short sales and auction properties. Some of them you need to pay for membership. These sites tend to have more current information than the free ones.

Your cash flow is going to depend a lot on the amount of rent vs. price and the number of units if you are looking at 2-4 unit property. Cash flow of $400 per unit is going to be very difficult. A more reasonable expectation would be $100 month/per unit net profit as a good cash flow and a great cash flow would be $200. Investors use the 50% rule. Take the gross income and subtract 50% for vacancy and operating expenses. The remainder will be left to pay your mortgage and give you cash flow. Figure out your mortgage payment and subtract that. What is left over is your cash flow.

5

Note that conventional Fannie Mae lenders like WF will begin counting the net cash flow (NCF) from your rentals once you have two years of landlording experience as documented on your Sch. E. NCF is (gross rent * 75% - PITI). So your limit of $175,000 is only in effect during the first couple of painful years where the banks require you to carry the entire PITI in your DTI ratio without considering any of the rental income. So get the first one under your belt as soon as possible. Probably too late for 2012 at this point, so you’ll end up using 2013/2014 as your years of building the requisite “experience” in the eyes of the lender, and in 2015 you will be able to get more financing.

It’s possible that you may find a local bank lender that will be more flexible on the experience requirement, but this won’t be 30-year fixed rate money. This will be a loan that’s fixed for 5 years, then floats for the other 20-25 years of the term. Once you have the experience, you could then refinance out of this into a 30-year fixed Fannie Mae loan in a couple of years. But the reality is that many of the local bank lenders also follow the Fannie Mae underwriting pretty closely, so you may have no luck. Call small banks and credit unions in your area and ask about their in-house or portfolio lending for investment properties. But definitely do your 3 Fannie Mae loans FIRST, and ONLY THEN consider local bank portfolio loans. Also bear in mind that local bank loans are only available in the bank’s market area, and the bank will require that you live in that area. Fannie Mae conventional loans can be anywhere, and you don’t have to live in that area. So using these three to purchase in a high cash flow market elsewhere is something to consider, especially since you’ll only be in your current location for a few years.

Find a good savvy investor-centric agent, and also call some property management companies. Most PM companies are run by licensed agents (required in most states), and they generally are in a good position to help locate good rental properties. As far as agents, there are agents in every market that specialize in handling REOs (foreclosed lender owned properties), and agents that specialize in short sales. These agents have often been through specialized training. Connecting directly with these agents can be very helpful in getting access to good deals. You can start by identifying these agents and then looking at their listing inventory. Go to homepath.com and hudhomestore.com for your market area, extract the listings, and see which agents have the most listings. Be aware that successful REO agents are “transaction factories”, they can be hard to get ahold of, and they don’t “show houses” when it comes to cheaper rental properties. Just let them know that you’re in the market for three properties, and your investment parameters.

For Fannie Mae REOs on homepath.com, some are available for “renovation” financing. For other situations, it can be difficult to get investment property financing and will depend on how distressed the property is. If it’s just moderate distress, you can probably get financing, but you’ll have to come out of pocket with the rehab expenses, which really drives up the cash you’ve got invested in the property.

Some investors use a local bank or hard money lender for a 6-mth “rehab loan” (higher rates and points), then refinance out of it at the 6-mth point of ownership to a 30-year fixed rate loan. The rehab lender will finance a good portion of both purchase and rehab, which minimizes the cash needed, and on the refinance the conventional lender can use a new appraisal at the 6-mth point of ownership when calculating the LTV, so in theory you can do these with minimal cash required.

If you can afford to pay cash for the purchase + rehab (consider using a 401-K loan for this, you can borrow up to $50K), then google the Fannie Mae Delayed Financing Rule, which can be a great way to maximize your financing.